TMFDeej (99.32)

72% Outperformance for second step conversions

6

I mentioned yesterday that I had come across some interesting statistics about the outperformance of certain types of special situations. I have already talked about spinoffs. Today I want to mention a different type, demutualizations. A demutualization is the conversion of a mutual bank that is owned by the depositors into a public company. When these banks switch or "convert" to public companies, they usually do so in two steps...a first step or stock offering and a second step.

The offering of stock usually results in a smaller bank that has a ton of excess capital. If this bank is trading at less than its tangible book value, even better because it can buy back stock at a discount, creating a ton of shareholder value. Better yet, demutualized banks often make very attractive acquisition targets for larger institutions. Approximately on third of comverted mutuals end up being taken over.

So, how attractive is this sort of special situation? According to a study by Sandler O'Neill & Partners, the stock of banks that have undergone a second step conversion has outperformed the Nasdaq Bank Index by an average of 72% over a five year period! Sign me up.

Alas, while there has been a decent number of demutualizations lately they are becoming an endangered species. According to one count, the number of mutual banks that are left in the United States has dwindled to around 500. The number of conversions had dropped significantly from seventeen annually several years ago.

I have been adding as many demutualizations as I can find to my CAPS portfolio and I have been slowly creating a basket of them in my real money portfolio. Here's a few articles on recent or upcoming mutual conversions that I have found interesting: